Spot gold extended its stunning rally to the eighth day on Friday as the US nonfarm payroll report of February was weaker than expected. The metal rose to a fresh record high as it hit $2195 before closing with a gain of 0.89% at $2179. It posted a whooping weekly gain of 4.60%.

The US employers added 275K jobs in February, which was above the forecast of 200K jobs; however, the unemployment rate rose to a two-year high of 3.90% from 3.70% in January and was way above the forecast of 3.70%. Moreover, the previous two-month figures were revised lower by 167K jobs and government hirings accounted for 52K jobs, which took the sheen off the headline number. Average hourly earnings m-o-m came in at 0.10% versus the forecast of 0.20%, while y-o-y earnings at 4.30% met the forecast though it was lower than the prior data of 4.40%. Labour force participation at 62.50% was lower than the estimate of 62.60%.

The US bonds rallied on a soft job report, though the ten-year yields recovered nearly 1% from the day’s low to close with a loss of 0.26% at 4.08%. The ten-year yields were down nearly 2.50% on the week, whereas the two-year yields fell 0.57% to close at 4.48% Friday and were down nearly 1.50% on the week. The US Dollar Index closed lower for the sixth straight day Friday and was down around 1% on the week.

The US treasury will sell $117 billion in treasury coupons from Monday to Wednesday, so investors sold into Friday’s bond rallies, which kept a floor under the falling yields, which in turn capped the gains in gold, which means that gold may rise further once the treasury coupon selling is over.

Data round up

The US data released in the week ending March 8 were mostly downbeat. It was the second consecutive week of disappointing US data. ISM services Index (February) came in at 52.60 Vs the expectation of 53. The employment component slipped into a contraction, Factory orders in January fell 3.6% Vs the forecast of a decline of 2.90%, whereas durables goods orders fell 6.20% Vs the expectation of a decline of 6.10%. Durables Ex transportation fell 0.40% Vs the forecast of 0.30%. However, S&P Global US services PMI data at 52.30 topped the estimate of 51.40. Unit Labor costs (4Q final) came in at 0.40%, thus falling short of the forecast of a 0.70% rise, which weighed on the US Dollar Index, and thus further supported gold. Initial jobless claims (March 2) rose to 217K from 215K (March 24) as against the forecast of 216K. January JOLTs openings at 8863K jobs were better than the forecast of 8850K jobs though.The Euro-zone’s services PMI data was noted at 50.20 as against the forecast of 50 as the services Index bounced back in the expansion zone after six months. The UK services PMI stood at 53.80 Vs the initial estimate of 54.30.

Central banks’ stances positive for gold

As inflation in major economies has been coming down almost on a consistent basis and is getting closer to the comfort levels of central banks, the Central bankers’ focus is slowly turning towards economic health. So it is not surprising that Central banks have started discussing rate cuts. The European Central Bank in its recently concluded monetary policy has signalled that the rate cuts may begin in June.

Similarly, the much-awaited Fed Chair Powell’s two-day testimony was somewhat less hawkish as compared to his recent speeches. In his semiannual Humphrey-Hawkins testimony to Congress, Powell said that the Federal Reserve remains squarely focused on its mandate to promote maximum employment and stable prices for the American people.

He added that the policy rate is likely at its peak and that it will likely be “appropriate” to cut rates “at some point this year”, though he observed that the FOMC still needs “greater confidence” before cutting rates. He said further that the timing and amount of rate cuts “depend on the path of the economy” as he mentioned that the committee already has “some confidence” about disinflation, but still needs “a little bit more data” that confirms inflation is moving sustainably down to 2%. He noted that both the economy and labour market are in a good place, so the FOMC can wait a bit.

In his testimony on Thursday, he told Congress that the Fed can and will cut rates this year provided incoming inflation data is as per expectations.

The Fed Chair mentioning employment in his testimony’s opening remark and ignoring any references to both the recent pick up in inflation as evident in January data and the risk of asset price inflation have been largely construed as dovish.

Data next week: US CPI inflation data crucial

Next week’s major US data include February CPI, retail sales advance (February), PPI (February), import price Index (February), industrial production (February), and University of Michigan sentiment and inflation expectations (March preliminary). Out of the Eurozone, Germany’s CPI (February final) and the Eurozone’s industrial production (January) will be of interest. The UK’s monthly GDP report (January) and job report (January) will also be in focus for investors. Investors will also monitor Japan’s GDP (4Q final) and China’s new Yuan loans, PPI (February, CPI (February), new home prices (February) and China’s central bank’s decision on 1-year and 5-year medium-term lending facility rates.

Central banks’ buying supports metal

Strong buying by central banks continues to support gold prices. Total gold demand hit a record last year and is expected to expand again in 2024, according to the World Gold Council. Global Central Bank bought 1,037 tons of gold last year, which was only 45 tons short of the record set in 2022. Overall global consumption climbed by about 3% to 4,899 tons last year, supported by over-the-counter market buying and central banks’ purchases, which is the highest total figure since 2010. China’s central bank added gold to its reserves for the 16th straight month in February.

Bullion held by the People’s Bank of China rose by about 390,000 troy ounces to 72.58 million troy ounces last month, which is equivalent to about 2,257 tons. The Council sees a case of strong gold buying by countries like China and Poland this year as it expects central bank buying to top 500 tons.

Outlook for the next week

Gold is likely to remain buoyant ahead of the US CPI inflation data. If February inflation data alleviate the inflation concerns emanating from January inflation figures, gold may get further upward traction. As the US Federal Reserve is expected to strike a less hawkish tone in its upcoming March 20 FOMC monetary policy decision meeting, gold is expected to find good support into the dips. However, as yields and the Dollar do not provide any obvious reasons for this stunning gold rally, price swings may be quite wild. More so silver is not being able to ride on gold’s coattail.

A benign US inflation report and heightened expectations from the March 20 FOMC meet will keep the metal bid. A rise to $2300 is positive in the near term. Support is at $2165/$2135/$2100/$2088. Resistance is in the $2200-$2215 zone followed by $2250.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas).